Question

Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VaR) method based on a 95 percent confidence level. What is the maximum one-day percentage loss if the expected percentage change of the euro tomorrow is 0.5 percent

Answer 1

The maximum one-day percentage loss = -1.15%

Explanation:

Let assume that with the normal distribution, 95% of observations are smaller than 1.65 standard deviations above the mean.

Given that:

Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days.

if the expected percentage change of the euro tomorrow is 0.5 percent

and that Z value at 95% C.I level = 1.65

∵ The maximum one-day percentage loss = (expected percentage change - Z-Value) × standard deviation

The maximum one-day percentage loss = (0.5 - 1.65) × 1

The maximum one-day percentage loss = -1.15 × 1

The maximum one-day percentage loss = -1.15%